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Emerging markets: be selective and consider debt

Date: Oct 08th, 2014

With share valuations in emerging markets looking relatively cheap compared to those in developed markets, we explore what investors need to look for before taking the plunge.

Be selective

While emerging market shares are relatively cheap, the current health and future prospects of individual countries within this segment can differ significantly. Therefore, while we expect investors will benefit from general exposure to emerging markets over the long-term, the short-term picture requires investors to be more discerning and pick and choose based on individual country and company fundamentals.

For example:

  • Argentina’s problems are well-known and its ‘default’ reflects a problem with a hedge fund rather than broader emerging market debt problems.

  • Tougher sanctions for Russia will harm it more than the West. However, Russia is unlikely to cut off gas supplies to Europe given the long-term damage it will do to what is a key export-earner for it.

  • The softer trend in commodity prices is good for Asian emerging markets (as commodity users) unlike South America and Russia (commodity producers).

  • China is looking relatively cheap at the moment and India is looking expensive however the reform-oriented Modi Government in India bodes well for the future.

  • The Indonesian President is also reform-minded but there is uncertainty over the election results.

  • Brazil is a bit problematic given the populist approach of the Dilma Government so a change in government would be required before we become more optimistic on Brazil.

Consider debt levels

Investors in emerging markets should focus on current account surplus countries as they are less vulnerable to foreign capital flows, for example China and Korea, and therefore less susceptible to volatility when the US Federal Reserve decides to start raising interest rates again.

Final thoughts

While a recession in emerging market countries is unlikely, we are likely to see slower growth than we have witnessed over the last decade. The trend in commodity prices is softer (working against Russia and South America) and the last decade has seen some backtracking on economic reforms.

After posting solid returns since May, emerging markets have improved since the start of the year. However, emerging markets still have a lot of catching-up to do on the ground lost to developed markets since 2010. More broadly while they are cheap and still have some catching-up to do, investors do need to be more selective than was the case, say a decade ago regarding the emerging world.


About the Author 

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.


Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

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